Germany

Reform? But we are Germans

IT IS not so easy to be gemütlich when the dismal science rules your land. News headlines in Germany seldom stray far from budgets, pensions and other economic trials. In this sober setting, one issue is a true headline-grabber: tax reform. The idea is that a radical change of the tax system can put the economy right at a stroke. But since few agree on how this magic can be worked, its true attraction is that it appears to be the ultimate gauge of how far Germany is capable of reform.

Tax reform gets star billing from Helmut Kohl's conservative government, which advances it as a top priority. Theo Waigel, the finance minister, calls his now well-trampled plan (first presented in January) “the reform of the century”, though this was also the rave notice that Mr Kohl's team gave what turned out to be a modest tax overhaul made during the late 1980s. The thrust of the latest effort is a sweeping reduction of business and personal income taxes, achieved by slicing through the thickets of the current impenetrable system which, everyone agrees, stifles economic vitality.

Few Germans seem convinced, in fact, that even the most daring tax reform can resolve the problem of high unemployment, as the Kohl government suggests it can. Still, this is a handy argument for Mr Kohl to use when joblessness remains at its gloomiest spring level since 1945. And the prospect of steep tax cuts for business and the citizenry offers the enticing picture of a Germany freed from excessive financial regulation. The opposition Social Democrats need not accept the government's specific proposals to cut company taxes from 47% to 35%—or the bottom rate of income tax from 26% to 15%—to conclude that the reform should spur economic growth.

It is true that a similarly deep cut in the rate paid by high earners (from 53% to 39%) raises left-wing hackles. But a bigger problem may be how to make up for the fall in government tax revenues all this could cause. If it means slashing government spending, the economy could shrink rather than grow. If it means raising indirect taxes, then Germany's increasingly independent-minded states (the Länder) are against it, in particular the majority that are ruled by Social Democrats. One thing that haunts the Länder is the fear of being left carrying the financial can for the government in Bonn.

This provides an opening for Oskar Lafontaine, the Social Democrats' boss. Because tax reform is the centrepiece of Mr Kohl's snail-like programme to increase growth and jobs, Mr Lafontaine, a traditional left-winger, has made it the battleground for a personal contest with the chancellor. On-and-off “tax summits” (now tetchily off) have led nowhere, except perhaps to strengthen Mr Lafontaine's notion that, despite his lowly standing in the polls, he may be the orthodox-left champion to take on Mr Kohl for the chancellorship in Germany's general election next year.

The combative Mr Lafontaine resists cuts in taxes for the rich so long as Mr Kohl's loophole-closing plan does away with the current tax breaks for night, weekend, holiday and other work which, the Social Democratic leader thinks, his own supporters have particularly enjoyed. Further, he can block the reform by marshalling the doubters from the Länder in Germany's upper house of parliament, the Bundesrat. The Bundestag, the lower house, can then do little more than feint at reform.

This, so far, has been Mr Lafontaine's tactic. It is a funny time, however, for the leader of the rebounding centre-left opposition in Europe's biggest country to appear so attached, in old-left tradition, to the idea of the “social state”. Tony Blair's victory in Britain has caught Social Democratic fancies. Should the German left not be doing everything possible to return to power too? A modernist, pragmatic approach beckons.

This is hardly lost on the popular Gerhard Schröder, despite the fact that as Social Democratic premier of the state of Lower Saxony he may look like a barrier to tax reform. As a politician with wide-eyed respect for the market, Mr Schröder does not want to be seen opposing tax cuts for German business. He talked louder than ever this week of the need to modernise his party. No one took this as anything but a dig at Mr Lafontaine.

Mr Schröder wants to be his party's candidate for chancellor. So Mr Kohl is doing his best to stir up the Lafontaine-Schröder conflict. “If they want to learn from Blair,” taunts the chancellor, “they should back our tax reform.” But Mr Lafontaine is a stubborn man. The chances are that the tax issue will end up not so much the reform of the century as a mere episode in Mr Kohl's compromise-bound 15th year of power.